Your Questions About Stocks And Bonds

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Richard asks…

What are the differences between stocks and bonds?

How to know which one is the most accurate for an investment?

financi4 answers:

At the simplest level, stocks represent business ownership and bonds represent business debt.

Relative to any given business the stock is considered riskier than the bond because, if the business fails the assets of the company are sold and the bond holders are paid back before any stock holders are paid back.

Say you want to start a simple business – like a hot dog cart – but it turns out you don’t have enough money to pay for the cart, licenses, supplies etc – you only have half the money – 5k and you need 10k to start it.

You have a friend who has the other half of the money. If he invests – he gives you his 5k and owns half the business. After paying expenses you make 3000 a week – since you work the cart you get paid a salary of 2000 a week and the 1000 gets added to the value of the company.
If after one week you hate it and decide together to sell and you sell the cart and supplies for 5k (plus the 1k in cash) you’d split 6 k evenly and both take a loss of 2k as business owners (stock)
but if you keep working for a year at the same rate – there is 52k in cash in the company – if you sell the supplies for 4k you split 56k and you each have a profit of 23k on your investment.
The good and bad of stock ownership

on the other hand if your friend doesn’t want to invest – but will loan you 5k for your business at 10% interest.
If your business makes 3k a week (156 k in a year) you must pay your friend only 500 in interest and you can pay back to 5k and now you own the whole, successful business and he gets no other part of the profit.

If your business doesn’t succeed – if you make only 300 per week for 16 weeks and you decide to sell the business- you sell the cart and remaining supplies for 6k – you still must pay your friend back the 5k plus interest (depending on what you agreed it might be less than 500)- your friend still gets his money back and all interest but you have a big loss (and have been working for less than you can really afford to live on)- though if you in corporate – the loss will stop when the business is completely at zero – this is where bond ownership also has risk (risk of default)

so basically bondholders are not able to profit as much from the success of wildly successful businesses but also have less risk (but not zero because a some companies don’t have much assets or enough to pay all bond holders) in terrible failures

stockholders can have almost unlimited profit potential in success but can lose everything in failure much more easily (since they only get what is left after all bondholders are paid back in full)

Daniel asks…

Why do people include the stocks and bonds of foreign companies in their portfolio?

Please give me as many reasons as possible to the previous question.
Would you recommend that these investments be made in foriegn currencies or should the currency risk be hedged?

financi4 answers:

International debt and equity is part of a diversified portfolio for a number of reasons.

First, to spread risk. If the US economy flattens out, other countries may not.

Second, to take advantage of international growth. As the largest economy on the planet, it’s harder for big US companies to grow as fast as their counterparts in less developed markets. US companies already take advantage of the amazing infrastructure we have here. Imagine the growth spurt a telecom company in a 3rd world country would undergo as that country gets “wired up” (or as wireless tech gets better) and more of the population become potential customers

Third, I suppose currency diversification is important to some degree, but there are better ways to get it than foreign stocks and bonds

Fourth, higher returns on a lot of international debt than US debt

How’s that — for a start, at least.

Robert asks…

Where do I start if I want to get into stocks and bonds trading?

I have always heard that it is a lucrative business to get into, and I just can’t find the place to start.

financi4 answers:

First you need to open a trading account with a brokerage (Scottrade, E-trade, Charles Schwab, etc), and deposit money into it. Then you can buy stocks online with your account. You need to know how to read stock charts and understand technical analysis in order to decide which stocks are the best ones to trade at that time. Technicals tell you the most likely direction of a stock over a given time frame.

Mark asks…

How should stocks and bonds be left? to a benificary or to the estate?

if a person have stocks and bonds and personal accounts should they be left to a beneficary or just pput in the will as a part of the estate.?

financi4 answers:

If they are part of the estate, they will have to go through probate, which costs money. It is to your advantage to leave them directly to a beneficiary. Also if they are in the estate, they may have to be liquidated to satisfy all the parties of the will which means delay in settling and transaction costs.

Steven asks…

What Are Tea Party Members Telling Rich People Who Own Stocks And Bonds?

So what does the Tea Party have to offer….a two step debt ceiling plan in which a downgrade is likely and there will be no confidence in the markets for the next 6 months?

And the alternative is a default…?

Is the Tea Party offering any plan that will not cause the markets to tank? These markets serve A LOT of rich people…those with a sizeable stock and bond portfolio.

Just curious, what is the Tea Party’s rationale for offering plans that won’t help the stock market?

financi4 answers:

The rich took all of my money.

Charles asks…

Can you earn airline miles by using your credit card to purchase stocks and bonds?

I purchase about $28,000 a year in corporate bonds and other investments. I also spend another $3,000 a year on flights and hotels, and about $200 a month on restaurants. This could add up fast.

financi4 answers:

No broker can legally allow you to purchase bonds via credit card. You need to have the cash in your account, or a margin agreement to borrow from the broker.

It used to be possible to use a credit card to buy Savings Bonds online from the US government. Don’t know if that loophole still exists.

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